Question

1. Atlantic Northern Inc. pays an annual dividend rate of 8.00% on its preferred stock that currently returns 10.72% and has a par value of $100.00. What is the value of Atlantic Northern Inc.'s stock?

a. $111.94
b. $89.56
c. $74.63
d. $100.00

2. Suppose, due to high inflation, interest rates rise and pull the preferred stock's yeild to 13.94%. The value of the preferred stock will _________ (increase or decrease)?

Answer 1

First blanket 74.63

Second blanket $57.39

Step-by-step explanation:

Step 1. Given information.

Annual dividend rate 8%

Current returns 10.72%

Par value 100.00

Step 2. Formulas needed to solve the exercise.

Price = Dividend÷Current return

Value of preferred stock = dividend / stock's yield

Step 3. Calculation.

Price situation 1= $8÷10.72% = $74.63

Value of preferred stock = $8÷13.94% = $57.39

Share value decreased.

Step 4. Solution.

First blanket 74.63

Second blanket $57.39